Archive for the ‘Tax Fraud’ Category

There Is No Magic OID Process

Sunday, October 4th, 2015

One of my clients handed me a 1099-OID today. That’s income to him, duly noted on his now-filed tax return. A different individual decided to promote a very different OID plan, an “O.I.D. Process.” He’ll be spending nearly six years at ClubFed.

Duffy R. Dashner (aka Kevin Dashner) was a resident of Reseda, California (in the San Fernando Valley area of Los Angeles). He and co-conspirators founded a business called O.I.D. Process. The business filed phony Original Issue Discount (OID) refund claims–a whopping 200 refunds claiming $228 million.

The OID refund scheme has been around for some time. There’s supposedly a secret account that you can have access to by just filing some Form 1099-OIDs. You just claim that the money was all withheld, so you didn’t get any of it, and soon you have a tax refund! What can go wrong (besides it being illegal)?

Anyway, Mr. Dashner decided to promote his business via website. He had weekly conference calls to clients to help them prepare the returns. They received a 20% “refund acquisition fee” for all checks issued by the IRS, and they demanded clients change their address to an unnamed attorney (well, the DOJ press release says he’s an attorney but who knows for how long that will continue) to make sure that the conspirators got their share of the ill-gotten gains. Clients also had to pay an up-front registration fee.

Mr. Dashner pleaded guilty in June to conspiracy to submit false claims. He received 57 months at ClubFed and must also make restitution of $1,769,418. If someone tells you there’s a magic way of anyone getting money from the IRS by filing a Form 1099-OID, run, don’t walk, in the other direction.

Defalcations Send Randolph Scott to ClubFed

Sunday, September 13th, 2015

When I hear the name Randolph Scott, I think of the late actor. He played leading men (generally heroes in Westerns) during his long and illustrious career. This Randolph Scott is anything but a hero.

Randolph Scott of Doylestown, Pennsylvania (near Philadelphia) was an estate and probate attorney. He represented an estate, one valued at more than $6 million (at date of death in 2005), so an Estate Tax Return needed to be filed. Estate tax of $520,351 should have been paid to the IRS. That didn’t happen.

Instead, Mr. Scott diverted “approximately $2,317,917.67″ from the estate to his tax office. That’s theft. In 2009, the executor of the estate died. From the Department of Justice press release:

Scott failed to disclose the executor’s death so that Scott could continue to receive money intended for the estate at his law firm. Scott would then forge the deceased executor’s signature and deposit funds intended for the estate into accounts under his control. Scott had the successor executor sign a document renouncing the position of successor executor so that Scott could continue to forge the signature of the deceased executor and divert money belonging to the estate.

Mr. Scott pleaded guilty back in March to mail fraud, tax evasion, attempting to interfere with administration of internal revenue laws, and three counts of failure to file income tax returns. He was sentenced on Thursday to four years at ClubFed and must make of the $2.3 million he stole. Unlike a Randolph Scott movie, the only happiness with this ending is that this Randolph Scott won’t be doing this to anyone else.

The Family that Commits Tax Evasion Together Goes to ClubFed Together

Sunday, September 6th, 2015

You own a payroll company with your son. It’s been a good year, so you decide to give yourself a bonus from the corporation. There’s nothing wrong with that–it’s your company, and you certainly can pay yourself whatever you feel is appropriate. You do need to report that income on your tax return, of course. That last step was omitted by the subjects of this post.

William and Robert McCullough are a father and son who reside in Westborough, Massachusetts. They own a payroll company, Harpers Data Services, in Worcester, Massachusetts. There company did quite well from 2007 to 2012, as they deposited $11 million in two company bank accounts. They didn’t tell their company accountant about those two accounts. Well, the corporation only omitted $3.78 million from the corporation tax return.

Meanwhile, William McCullough wrote checks to himself, his son, and Gary Davis, a former owner of the business. One series of checks totaled $4.7 million; another was $2.7 million. That allowed the McCulloughs and Davis to avoid $1.7 million of personal income tax. The McCulloughs and Davis pleaded guilty to various tax evasion charges last week. William McCullough also pleaded guilty to wire fraud.

From 2009 through 2011, Harpers maintained client trust accounts and a client tax account. These accounts contained client funds, which were to be used to pay employees’ paychecks and employees’ federal and state taxes. From 2009 through 2011, William McCullough took approximately $1 million from the client trust accounts and deposited it into a Harpers account. In 2010, he took $750,000 from the client tax account and deposited it into a Harpers account. At the time William McCullough took this money, the funds belonged solely to the clients of Harpers Data Services. McCullough’s fraud resulted in a theft of approximately $1.8 million dollars.

The McCulloughs and Mr. Davis will almost certainly be heading to ClubFed. This is yet another reminder for everyone who uses a payroll service to join EFTPS and make sure your payroll deposits are being made. Trust but verify is excellent practice in payroll.

How to Commit Tax Fraud 101

Sunday, August 23rd, 2015

The Florida Center for Investigative Reporting (FCIR) has an article spotlighting tax return fraud. That in itself isn’t surprising given that Florida is the hotbed for this crime. What is depressing is how easy it is to commit the crime. While the Social Security Death List is no longer available for the fraudsters, FCIR reports that they turned to a commercial service called The site is designed for finding your ancestors, but enterprising crooks discovered it could be used to commit tax fraud.

My guess is that old records contain social security numbers–the numbers weren’t as big a deal in the pre-Internet era–and they just find people in that manner. Sure, they are undoubtedly violating the Terms & Conditions of the website but if you’re going to commit a felony (or several), what’s the big deal about violating some T&C’s?

Meanwhile, two press releases from the East Bay (near San Francisco) highlight the magnitude of this problem. Ebony Standifer conspired to obtain false identities and used them to obtain $193,602 in false refunds. She pleaded guilty this week to one count of conspiracy to file false claims and one count of aggravated identity theft. Three other East Bay residents pleaded guilty to conspiracy to file false claims in what appears to be a separate tax fraud scheme. These individuals received $287,498 in false refunds.

Until the IRS makes it far more difficult for the fraudsters, this epidemic will continue. As I’ve said, why rob banks?

Former Oklahoma State Senator Embezzled $1.2 Million & Committed Tax Fraud

Sunday, August 23rd, 2015

Ricky Brinkley used to be a State Senator in Oklahoma; he represented Tulsa and nearby areas. He resigned last week and then pleaded guilty to five counts of wire fraud and one count of subscribing to a false tax return.

Over a ten-plus year period Mr. Brinkley had fraudulently obtained over $1.2 Million from the Better Business Bureau. Mr. Brinkley was President and CEO of the organization; he created phony invoices and used the money for personal expenses and to support his gambling habit. He also admitted to not reporting $148,390 in income on his 2013 tax return.

Mr. Brinkley agreed to forfeit $1,829,033.66–the proceeds from his embezzlement. FBI Special Agent in Charge Scott Cruse of the Oklahoma City Division stated,

[C]riminal investigations against those holding positions of public trust are never easy, but they are among some of the most important cases that we do in the FBI. That is because we hold our public servants to a higher standard. Our citizens expect their public servants to uphold the law in all aspects of their lives, whether it be in connection with their public responsibilities or in their personal endeavors.

Mr. Brinkley faces a term at ClubFed; he’ll be sentenced later this year.

Two Sets of Returns Aren’t Better than One

Sunday, August 16th, 2015

As I get ready to teach a course in ethics, I have plenty of practical examples of things not to do. Today I look at the idea of preparing one set of tax returns for clients but using a second set of returns when submitting the returns to the IRS. Of course, those second returns had higher refund amounts with the difference being pocketed by the preparers. After all, what’s a little tax fraud?

Well, it’s a crime, and Ahmed Grant and his wife Lillian Madyun will likely get to sample ClubFed. Ms. Madyun also has the dubious distinction of being a former IRS employee. The two pleaded guilty to conspiracy to commit fraud against the United States last week. The two had pocketed at least $160,000 from their scheme (which they did in the Memphis area) but they face up to ten years each at ClubFed and fines of up to $250,000 each.

There’s Innocent FBAR Violations, and There’s This

Tuesday, August 11th, 2015

It’s one thing when Aunt Sally inherits €8000 in the old country, it sits in the bank for one day, and she then gets the money the next day in the US. Yes she should have filed an FBAR, but it really is an innocent violation.

Then we have what David and Nadav Kalai did. The two (father and son) headed up United Revenue Service, a tax preparation firm with offices in Orange County, California and Bethesda, Maryland. The Kalais’ methods were of the very deliberate violation of the rules on FBARs:
– Take a high wealth individual,
– Have him form a foreign corporation in Belize,
– Have that corporation get a bank account with Bank Leumi (an Israeli Bank) in Luxembourg, and
– Don’t disclose any of this to the IRS, FINCEN, or the Department of the Treasury.

Last year they were convicted of one count each of conspiracy to defraud the IRS, and two counts of willfully failing to file an FBAR. Yes, they practiced what they preached: They used the same methods to not disclose their own foreign bank accounts.

The sham corporations that the co-conspirators incorporated in Belize and elsewhere were used to act as named accountholders on the secret Israeli bank accounts. The co-conspirators then recommended and facilitated the transfer of client funds to the secret accounts and prepared and filed tax returns that falsely reported the money sent offshore as a false investment loss or a false business expense, or entirely omitted any income earned by a client from a foreign source. The Kalais also failed to disclose the clients’ secret accounts on tax returns that they prepared, and caused the clients to fail to file FBARs with the U.S. Treasury as required.

The Kalais will have some time to think over what they did. David received 36 months at ClubFed and a $286,000 fine while his son received 50 months at ClubFed and a $10,000 fine. An alleged co-conspirator, David Almog, remains at large. Meanwhile, three customers (so far) of the Kalais and United Revenue Service have pleaded guilty to tax charges, and there are likely more charges coming.

Why Rob Banks, Redux

Tuesday, August 11th, 2015

Back in 2012 I noted that gangs were looking at identity theft as the successor to bank robbery. From Los Angeles comes the news that the California Attorney General’s Office, along with the Long Beach Police and the US Postal Inspection Service did a “takedown” of the “Insane Crip” street gang; 22 members are in custody on charges that include 283 counts of conspiracy, 299 counts of identity theft, and 226 counts of grand theft.

The arrest is the culmination of a three-year investigation into the Insane Crip street gang that began after a Long Beach crime spree tied to the gang. A Long Beach Police Department detective discovered evidence containing the personal identifying information of hundreds of California residents at an address associated with the gang. The defendants had used the stolen personal identifying information to commit financial crimes, including identity theft and tax return fraud.

The defendants exchanged the stolen information via text messages to the leaders of the scheme, who would then file fraudulent tax returns, obtain the refunds and load them onto prepaid debit cards in the name of other victims. The debit cards were then used to fund the gang’s illicit activities, lavish lifestyle and to recruit members.

Kudos to all involved, but I will point out, again, that while the IRS has done more to make identity theft difficult, they’ve done nowhere near enough. Even today most of what the IRS does on this front is reactionary. While electronic returns filed now note the computer they’ve been filed from–which is a help–there is much more the IRS could do. The modest proposal I made nearly three years ago would still stop much of today’s identity theft. Yet the IRS spends money on the Annual Filing Season Program. Oh well, venting doesn’t do any good….

Yes, Illegal Income Is Taxable

Sunday, July 19th, 2015

If you commit fraud do you have to report the illegal income on your tax return? Absolutely! Illegal income is just as taxable as legal income. Al Capone went to prison not for the murders and other crimes he committed but for tax evasion.

William Richmond of Atkinson, New Hampshire learned that lesson. He held a durable power of attorney and used that to allegedly commit fraud. This past week he pleaded guilty to tax evasion (but not the underlying fraud); he failed to report the illegal income on his tax returns. As part of his plea he will be required to make restitution to the couple he stole from. He may also be heading to ClubFed.

A Peabody, Massachusetts Tax Preparer Gives an Unwitting Endorsement for EFTPS

Sunday, June 28th, 2015

Barry Ginsberg operated a payroll tax service in Peabody, Massachusetts (near Boston). He endorsed escrow accounts for his clients; they would send him the money for the payroll taxes and he, in turn, would pay them. Since I’m writing about this, you’ve already figured out where the money didn’t go: to the IRS and the Massachusetts Department of Revenue. Mr. Ginsberg, who was indicted back in 2013, pleaded guilty to multiple tax fraud charges on Friday.

Mr. Ginsberg operated a traditional payroll service. It’s fairly easy to check on your payroll company if you use such a service: Enroll in EFTPS. Using EFTPS you can verify that your payroll company is making the payroll deposits they say they are. That’s a good idea–trust but verify. The DOJ Press release notes:

To cover up his scheme, Ginsberg falsified his clients’ tax returns, which he was hired to prepare, indicating that the clients’ payroll taxes had been paid in full, when they had not. When asked by clients about their mysterious IRS debts, Ginsberg gave them a litany of false excuses, including blaming the IRS and his own staff.

None of those excuses work hold up with EFTPS. Today, payroll tax deposits with the IRS are all made electronically. Is it possible for one to get messed up? Yes, but it’s very unlikely. Indeed, most payroll companies just make sure the deposits are made from your payroll bank account.

Mr. Ginsberg will likely be spending years at ClubFed. Unfortunately, the business owners who trusted him may be spending years getting out of debt with the IRS and Massachusetts.